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Thursday, April 24, 2014
News Making Money

Georgia’s labor code and business

Written by Daan Harmsen, FINANCIAL MANAGER, GEOCAPITAL MICROFINANCE ORGANIZATION

02/12/2012 21:20 (507 Day 05:50 minutes ago)

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The FINANCIAL -- The Georgian parliament has been discussing changes to the country’s labor code, with the aim of providing more protection to workers. What will these changes mean for businesses operating in Georgia? In this article, I will briefly touch on the current labor code, discuss some of the changes that are proposed, and finish with some thoughts on labor regulation.

The current Georgian labor code, passed by the former UNM-dominated parliament, is very flexible and barely offers employees any protection.The philosophy of the law seems to be to regulate only the bare minimum, and to allow employers and employees to define almost everything as they see fit in their employment contracts. In fact, the Georgian labor code (in English translation) is only 23 pages long. Compare that with the French code du travail, of which the table of contents alone takes up 94 pages!

The Georgian labor code allows companies to fire employees at will, with only one month’s pay, or even none, if defined explicitly in the employment contract. However, it does offer some protection to strikers, who are allowed to strike for up to 90 days. The law also allows collective bargaining, but does not force any employee to have his interests represented collectively instead of individually. The law does not set any minimum wage.

According to Radio Fortuna’s website, the parliament is considering making several changes the the labor code. Probably most importantly, it would make it impossible to for an employer to fire an employee for no cause without a 30-day notice and one month of pay. The law would also make it illegal to fire a woman during her maternity leave, and further protection of collective bargaining processes would be introduced.

While these changes are minor and won’t significantly affect companies’ hiring policies, they pave the way for more stringent labor regulation. In fact, the question that is often asked is: will Georgia move towards an American model or a European model? When someone asks this question, they often imply a European model to mean stricter rules about employment termination, a relatively high minimum wage, more generous legally-mandated benefits, and more provisions for collective bargaining. On the other hand, they see the American model  as having relatively easy rules about employment termination, a low minimum wage, and few legally-mandated benefits (although this may change with the new healthcare law).

However, this is the wrong question: Georgia’s model is on the right of both the American and the European model, and will probably stay that way for a long time: it is not even close to offering workers the same protections that the European and American labor codes do.

One reason for that is that the ability to hire and fire easily is critical for businesses in developing countries. Most importantly, in a developing country like Georgia, it is harder to know whether a candidate is really ready for the job without hiring the person for a few months. The quality of education varies widely, and can be very hard to assess: while in the West, a fancy degree is usually a good indication of a person’s ability (although not always), in Georgia it may not mean much. Also, because in developing countries, many job-seekers have poor interview skills, it can be hard to pick the right candidate on just the basis of a series of interviews.

Minimum wage laws are another potential obstacle with regards to employment. Although the empirical evidence, mostly collected in developed economies, is inconclusive, classical microeconomics posits that when an employer is contemplating hiring a new employee, that employee is only hired if her or her contribution to the company (the “marginal product of labor”) is at least as great or greater than his or her salary and associated employment costs. If you set a minimum wage, for example at 3 GEL/hour, inevitably the low-skilled person who only produces 2 GEL of value every hour will not be hired anymore. Because there is much more low-skilled labor in developing countries than developed countries, this is a bigger issue in countries like Georgia. For example, a 1997 study by Oxford-economist Patricia Jones shows that the minimum wage in Ghana caused a reduction in formal sector jobs and an increase in informal sector jobs (that are not bound by minimum wage laws).

Keeping in mind the unique circumstances that developing countries face, the flexibility offered by Georgia’s current labor code is an attractive proposition for companies trying to do business here. While changes around the edges probably wouldn’t do much to the country’s investment climate, a large-scale overhaul would hurt the ability of businesses to grow, hire, and create jobs, and would leave a lot of low-level employees out in the cold, instead of helping them.

 

 

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